Wednesday, November 3, 2010

Terremark's Guidance Goes Up 1%, Its Stock Rises 13%

By David Gross

Wall Street continued its manic buying and panic selling of data center stocks yesterday, with Terremark rising 13% to just over $11 a share after it lifted FY2011 revenue guidance 1%, from $346 million to a range of $350-$353 million.   This gave the stock an expectations multiple of 13, or 10 if you want to round from the midpoint, not much lower than the wild 17 Equinix got when it guided down 2% and dropped 35%, and guided up .4% and rose 7%.    It's also higher than the expectations multiple of 4 that Riverbed got when it guided up 5%, and rose 20%.

Corporate revenue was up 21% y/y to $163 million, and similar to the growth rates we've seen with Equinix and Rackspace.   And remember all the Wall Street panicking over the colocation market after Equinix's infamous October 5th announcement?  Terremark's colocation revenue was up 32% y/y to $70 million.

The Federal Government accounted for 21% of the company's revenue, and Terremark made a very smart move bringing its government customers way out to Culpeper, rather than trying to compete against DLR, Equinix, and DFT in Ashburn, which is 60 miles closer to DC, but also closer to terrorist targets.   Ashburn is about 30 miles from Washington, and as a Virginia resident, I can tell you the only thing within 30 miles of Culpeper, besides cows and hills, is James Madison's estate at Montpelier, which often gets overlooked with Monticello another 25 miles down the road.   So while Terremark might call its Culpeper data center campus the "NAP of the Capital Region", it would be a bad idea to tell a local in Culpeper County that he's a suburban Washingtonian.

While Terremark also leases space in Santa Clara and internationally, the NAP of the Capital Region and NAP of Americas in Miami represent over 80% of its space, including 100,000 square feet it has yet to develop in Culpeper, which is far larger than the extra 20,000 feet in Santa Clara it said it would lease during the earnings call.  This geographic focus is paying off in its asset utilization, with the company generating $652 of annualized revenue with just $476 million of Property, Plant, and Equipment on its books, or a ratio of 1.37, far higher than the <1 ratios put up by Digital Realty and Equinix, and nearly as high as the 1.6 put up by Rackspace, which doesn't spend a dime on building construction.    This is balanced out though by hits on the income statement for sales and support costs, however Terremark's net margins improved over the year from -16% to -11%. 

While I refer to EBITDA occassionally here, I did too many financial plans for CLECs and ISPs ten years ago to take the metric too seriously, and similarly have a problem using it to measure so many of these capital intensive data center providers.   Depreciation might not be a cash expense, but it gives an indication of how efficiently a company uses its fixed assets, and how well its times its capex relative to revenue, so I can't report on "adjusted EBITDA" with a straight face.   So while Terremark is EBITDA positive, that would be meaningless if it wasn't improving net margins.

Investors looking at this company who don't want to buy and sell with the herd should probably take a little attention off the top line, and instead consider how Terremark has been able to grow with a fairly tight geographic focus.  Dominating Culpeper and downtown Miami is proving to be a better strategy than having a small piece of Northern New Jersey or Chicago.

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